In her blog, Francine McKenna describes – in great detail – how an audit committee member came to become a whistleblower. That’s something I had never heard of happening before. The whistleblower director was at AgFeed, one of the Chinese frauds in the news…
Cat Fight? NASAA Kindly Objects to SEC’s Regulation A+ Proposal – Other State Commissioners Not So Much
As Keith Bishop blogs, the association for state securities regulators – NASAA – recently submitted this comment letter on the SEC’s Regulation A+ proposal, objecting to potentially being exempted from these offerings.
Keith goes on to note 3 other comment letters – from the state securities commissioners in Arkansas, Nebraska and Massachusetts – who complained much more loudly. As Keith notes, states really have lost much of their regulatory authority over the years and maybe they are at that “last gasp” stage. Sorry states! It’s not a battle you are likely to win. The “futures” on blue sky lawyers just went down another 10%…
In this DealLawyers.com podcast, Matt Little of PKWARE explains how his software enables lawyers and other deal participants to securely access and share files without using a data room, including:
– What can happen if practitioners don’t address data security issues if they aren’t using a traditional or virtual data room?
– Minimum someone should do to address data security challenges?
– What Viivo is, and how it’s used in the context of a deal?
– What factors should be considered in determining whether to use a product like Viivo vs. a data room?
– What are some success stories?
One of the strangest things in corporate governance is that more than a few companies take the cardinal rule of “Our customers are always right” – and add the premise of “But our owners are always wrong.” I’m worldly enough to recognize that not all shareholders are the same – and thus, some truly are adversarial to management – but that still doesn’t explain why some companies go to great lengths to treat most shareholders with little respect (for example, holding annual meetings in far-flung locations).
To highlight this oddity, we have entered into an era of “shareholder engagement.” A good thing – but it boggles my mind that companies hadn’t been engaging with their shareholders all along. Anyways, the latest wisdom in this area is the new “SDX Protocol,” which is a set of 10 common sense principles that companies & shareholders can use to help them engage (you have to register to access it, but it’s free).
In this podcast, Anthony Goodman of Tapestry Networks (who led the SDX Protocol meetings) explains the new SDX Protocol, including:
– Can you explain who you and Tapestry are?
– What were the origins of the project?
– How often did the working group get together?
– Any principles left on the cutting room floor?
– What exactly is management’s role in engagement?
– Any surprises by the reaction to the announcement of the protocol?
– Any additional activity going forward?
By the way, in his blog last night, Mark Borges highlighted a nice piece of disclosure by a company about its shareholder engagement efforts – includes disclosure of the % of shareholders that were engaged…
Icahn Weighs In: The SDX Protocol
Meahwhile, Carl Icahn weighed in on the new protocol by saying it has “tremendous potential” – and noting that he doesn’t buy positions of a company for a quick pop. Carl provides a table with a list of his investments and the tenure of his holdings. Here is an excerpt from his piece:
It is, of course, incumbent upon institutional shareholders to be responsible stewards of the funds they manage, and the Shareholder-Director Exchange has the potential to create an open path for these shareholders to engage in meaningful dialogue with the directors who oversee their investments. However, as highlighted by Kenneth Squire, publisher of The Activist Report, there are some troubling aspects of the 10-point protocol for engagement that was released by the Shareholder-Director Exchange. For example, I see no reason why a director should consider a shareholder’s voting history when deciding whether or not to hear that shareholder’s concerns. No shareholder should ever be penalized for exercising their inherent right to vote how they see fit.
Nevertheless, the formation of the Shareholder-Director Exchange is in and of itself a positive development if for no other reason than to stand in stark contrast to the hawkish approach that has for years been championed by firms, such as Wachtell, Lipton, Rosen & Katz LLP (“Wachtell Lipton”) and Goldman, Sachs & Co., who have made fortunes from corporate conflicts by spreading the implementation of entrenchment devices, like the poison pill and staggered board. Just recently Wachtell Lipton promoted a new entrenchment scheme whereby incumbent directors unilaterally amend a company’s bylaws to disqualify certain individuals from challenging their positions on the board – a move that was widely criticized and quickly discredited.
Pay Ratio Miscellany: Shareholder Proposals & Disclosures
With over 120k comments received by the SEC, the pay ratio proposal officially has garnered the 2nd highest number of comments in the SEC’s history. Just throwing that out there. For an example of a company that has used internal pay equity for years in setting its senior manager’s pay, check out this blog by Mark Borges, which summarizes the latest disclosures from Whole Foods.
Also, in the shareholder proposals area, some predicted there might be pay cap proposals that use pay ratios as the formula – particularly in light of what happened in Switzerland. This request for no-action relief by 3M bears that out…
With news of Rep. John Dingell announcing yesterday that he was retiring – the longest-serving Congressman in history – it brought back memories of “Dingell-grams.” In the ’90s, as head of the House Oversight Committee, Rep. Dingell would regularly send letters to the SEC asking for all kinds of information. This was a significant drain on senior SEC Staff resources.
At the time, I thought how crazy this was. Little did I know that – fast-forwarding two decades later – that Congressional requests to the SEC would increase by a factor of at least 3 or 4. It’s no longer just the heads of the Senate Banking & House Financial Service Committees that are interacting with the SEC – it’s nearly every member of those committees and their staff.
I’m not saying the SEC should be free from oversight. But many of the requests are “for show” – just like many Congressional hearings are – and the questions presented are made with minimal knowledge of the subject matter. It’s a shame and it’s a real problem because some experienced practitioners who might otherwise take a pay cut to serve our country working for the agency take a pass. They understandably don’t want to get caught up in the political maelstrom that permeates the halls of federal agencies these days. And those stuck working in the federal government spend a lot of time catering to Congress rather than focusing on their core mission…
What The? Exclusive Preview of Warren Buffett’s Annual Letter to Shareholders?
When I first saw the title of this Fortune article, I thought Warren Buffett’s popular letter to shareholders was now publicly available (and on it’s way to being furnished to the SEC, it is not “filed”). But I was surprised to see that the article was based on an “exclusive excerpt from his upcoming shareholder letter.” The article is general investment advice and not about Berkshire Hathaway – so I have no securities law concerns – it’s just so unusual to see a “special sneak” preview of a letter from the CEO…
Webcast: “The SEC Staff on M&A”
Tune in today for the DealLawyers.com webcast – “The SEC Staff on M&A” – to hear Michele Anderson, Chief of the SEC’s Office of Mergers and Acquisitions, and former senior SEC Staffers Brian Breheny of Skadden Arps, Dennis Garris of Alston & Bird and Jim Moloney of Gibson Dunn discuss the latest rulemakings and interpretations from the SEC.
1. We are a downstream company (ie. uses minerals in design/manufacture) required to conduct a “reasonable country of origin inquiry” (RCOI) and our process is:
– Engage 1st-tier suppliers with questionnaire; review responses; check any smelters identified against independent verified lists; no further action if no reason to believe from responses received (even if less than 100% response rate) that the conflict minerals may have originated in the covered countries – 65%
– Engage 1st-tier suppliers with questionnaire; review responses; check any smelters identified against independent verified lists; for unresponsive suppliers, perform further engagement (including 2nd-tier and above) – 25%
– No direct engagement with suppliers; rely solely on smelters identified on independent verified lists – 0%
– Outsource entire process to 3rd-party service provider & rely on their conclusions – 0%
– Other – 10%
2. We are a downstream company that sends questionnaires to 1st-tier suppliers and they’re non-responsive/unable to answer completely and our next step is:
– Nothing, we’re done – and will disclose that we have no reason to believe that conflict minerals may have originated in the covered countries – 3%
– Further engage 1st-tier supplier (eg. calling, e-mails) but not 2nd-tier supplier, etc. – 82%
– Further engage 1st-tier supplier, 2nd-tier supplier, etc. – 10%
– Other – 5%
3. If you choose “a” in #2 above, would you consider the company to have satisfied its RCOI obligation:
– Yes – 24%
– No – 38%
– Depends on what others are doing – 14%
– Not sure – 24%
4. Are you taking measures to ensure that your RCOI covers new products manufactured by the company up until December 31st:
– Yes, we have controls to monitor for new products with conflict minerals on a real time basis – 22%
– Yes, we have controls to monitor for new products with conflict minerals on a quarterly basis – 11%
– Yes, we have controls to monitor for new products with conflict minerals on a semi-annual basis – 16%
– Yes, we perform our RCOI once per year as of December 31 – 24%
– No, we perform our RCOI earlier in the year and do not worry about scanning for new products through December 31 – 27%
5. Has your company adopted a conflict minerals policy:
– Yes, we are adopting one responding to the new rule – 51%
– Yes, we had one prior to the new rule – 0%
– Yes, we had one prior to the new rule, but have updated it for the new rule – 0%
– No, but we’re considering it – 33%
– No, and we don’t plan to – 15%
6. If your company had to perform Step 3 of the new rule, how long did it take (soup-to-nuts)
– 0-3 months – 4%
– 3-6 months – 19%
– 6-9 months – 23%
– 9-12 months – 23%
– More than 12 months – 31%
Tune in today for the webcast – “The SEC Staff on International Issues” – to hear Paul Dudek, Chief of Corp Fin’s Office of International Corporate Finance, Alex Cohen of Latham & Watkins and Nick Kronfeld of Davis Polk discuss the latest rulemakings and interpretations on the international front.
Your Conflict Minerals Toolkit! January-February Issue of The Corporate Counsel
Dave & the gang did a yeoman’s job for the January-February issue of The Corporate Counsel that was just mailed, putting together a group of sample documents to go along with their analysis of complying with the new conflict mineral rules. The issue includes:
– Memorandum on Conflict Minerals Compliance
– Framework for the Analysis
– Conflict Minerals Policy
– Form SD and Conflict Minerals Report
Mark Cuban takes in a securities law conference! News at 11! As noted in this DealBook article, Mark was tweeting up a storm during PLI’s “SEC Speaks” on Friday. Wearing a grey hoodie – gotta love that (jealous! although maybe akin to my hat-wearing at the Society conference last summer), Mark apparently sat through the entire day on Friday. Impressive stamina!
Here is a handful of Cuban’s tweets during the conference:
You might recall I had my own run-in with Cuban on Twitter last month, as noted in this blog…
One Degree of Separation: Me & Mark Cuban
So I didn’t go to the conference – and thus missed Mark – but Terence Rasmussen of CarMax caught up with Cuban & here is a pic of them together:
And then here is a pic of me with Terence a few hours later:
SCOTUS Briefs: SEC Files In Halliburton Fraud-on-the-Market Case
Over the weekend, the SEC posted its 49-page amicus curiae brief for the Supreme Court’s Halliburton Co. v. Erica P. John Fund case. Here’s a list of all the briefs so far. Oral argument is less than two weeks away, on Wednesday, March 5th…
Did you know that the disclaimer that SEC Staffers give when they speak is actually required by law? I recently learned that on my own even though I gave that disclaimer many times when I spoke in my capacity as a Staffer. Here is a 1-minute video about the disclaimer’s origins – I tried to inject some humor at the end:
Farewell to Sandra Folsom Kinsey
I’m sad to inform you that Sandra Folsom Kinsey recently passed away. Sandra worked at Hogan Lovells twice, both before and after a 12-year stint in Corp Fin during the ’90s and early ’00s, where she primarily worked in the Office of International Corporation Finance. She was a real sweetheart and we will miss her. She was married to Walt Kinsey, who also worked at the SEC. Here is an obituary, that also has a guest book.
FINRA Proposes More Changes to Corporate Financing Rule
In this blog, Steve Quinlivan notes that FINRA has proposed even more changes to Rule 5110 – on top of the ones I blogged a few weeks ago. These new proposed changes would impact unfair arrangements, termination fees and right of first refusals…
Hat tip to Bryan Cave’s Randy Wang & Jake Bielema – who represented the plaintiff Express Scripts – for alerting me to this summary judgment order by a federal court judge in Missouri against John Chevedden for including false & misleading statements in his proposal. As I blogged last month, this case was one of a few filed earlier this year against John – and the first time a judge has ruled against John outside of Texas.
Obviously, my prediction that John would win this case was dead wrong (my theory was the Corp Fin staff normally allows proponents to correct false & misleading statements before granting an exclusion request). In this case, the judge ruled that four statements were demonstrably false based on the company’s public filings and didn’t give an opportunity to cure.
As noted in its Form 8-K, a nano-cap company, CSP is the first company holding its annual meeting in 2014 to fail to gain majority support for its say-on-pay with only 42% voting in favor. Hat tip to Karla Bos for pointing this out!
We continue to post new items regularly on our “Proxy Season Blog” for TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:
– Majority Support Prompts Verizon Bylaw on Proxy Access
– How to Update D&O Questionnaires for “Bad Actors”
– New Defensive Tactic Leads to Negative Recommendations for Director Elections
– 2014 Proxy Season Checklists
– Group of 70 Investors Pressure Companies to Assess Climate Change
– Survey: Directors Split on Governance Engagement
I recently field a question in our “Q&A Forum” – #7944 – about trends in new risk factors for this proxy season. I noted that some companies are revisiting their cybersecurity risk factor is light of the Target situation and the other security breaches in recent months.
Brink Dickerson of Troutman Sanders also noted that he is a bit surprised that more companies are not including conflict minerals risk factors. While he doubts that the conflict mineral disclosure regime is material, or that the failure to comply will in the early years have significant consequences, it is a big enough issue with some socially responsible investors and special interest groups that he was expecting to see more Form 10-K disclosure. Here is an example of a risk factor that he has suggested as a starting place:
The Company is subject to recently adopted SEC disclosure obligations relating to its use of so-called “conflict minerals” – columbite-tantalite, cassiterite (tin), wolframite (tungsten) and gold. These minerals are present in a significant number of the Company products. The disclosure obligations are complex, and there is little formal guidance with respect to their application. The first reports under the disclosure obligations are due to be filed with the SEC not later than May 2014 and cover the Company’s activities during 2013.
Although the Company expects to be able to file the required report on time, in preparing to do so it is dependent upon the implementation of new systems and processes and information supplied by its xxx+ suppliers of products that contain, or potentially contain, conflict minerals. To the extent that the information that it receives from its suppliers is inaccurate or inadequate or its processes in obtaining that information do not fulfill the SEC’s requirements, the Company could face both reputational and SEC enforcement risks.
He also expected to see more references in Item 1 or elsewhere to the existence of conflict minerals policies.
And then Dave Lynn added: I think another take on the conflict minerals disclosure that I have seen is that efforts to comply with the disclosure rules and to otherwise implement conflict-free sourcing policies is the extent to which changes to the supply chain can disrupt existing supply sources or cause more uncertainty with respect to the company’s supply chain. You could also envision how this might be relevant for the description of Business and perhaps MD&A as well depending on an issuer’s particular circumstances.
Steve Quinlivan notes that an industry group has launched the first integrated conflict minerals database for suppliers called “BOMcheck,” currently used by over 560 manufacturers to gather materials declarations from over 3,500 suppliers worldwide for more than 1.6 million parts.
Cybersecurity: SEC Calendars a Roundtable
On Friday, the SEC announced that it will hold a March 26th roundtable to discuss cybersecurity and the challenges it raises for market participants and companies, and how they are addressing those concerns.
Transcript: “How to Sell a Division: Nuts & Bolts”
I have posted the transcript for our recent DealLawyers.com webcast: “How to Sell a Division: Nuts & Bolts.”
On Friday, the SEC announced Betsy Murphy is rejoining Corp Fin to serve as the Associate Director who oversees the Offices of Rulemaking, Small Business Policy & Enforcement Liaision. Betsy was the Chief of Corp Fin’s Office of Rulemaking for 10 years before moving over to serve as the Secretary of the SEC, a post she held for 5 years. Betsy is a great catch and I’m sure those in Corp Fin are excited to see her back…
Going to a hoops game at Duke is my fav thing in the world. No better place to see a sporting event – here is a compilation of short vids I took this weekend to give you a flavor…
Shareholder Proposals: ISS Updates Proxy Voting Guidelines
A few weeks ago, ISS updated its proxy voting guidelines to address shareholder proposals that tackle proxy voting topics, including the controversial topics of interim vote tallies, confidential voting policies & treatment of abstentions and broker non-votes…
As I blogged this morning on my “Proxy Season Blog,” John Chevedden lost his appeal last week in the US Court of Appeals for the Fifth Circuit over a “proposal by proxy” case that he lost against Waste Connections last year…
Majority Voting: Toronto Stock Exchange Makes It Mandatory!
After nearly a year and a half of radio silence on the topic of majority voting, the Toronto Stock Exchange (“TSX”) announced on February 13th that it would proceed with amendments to the TSX Company Manual mandating that TSX issuers adopt majority voting.
The amendments, which were given the go-ahead by the Ontario Securities Commission, require that issuers, other than majority-controlled companies, be elected by a majority of the votes cast with respect to their election other than at contested meetings. This new mandate will apply to companies with fiscal year ends from June 30, 2014 on, and as such, will likely have little impact on the 2014 proxy season, particularly since roughly 80% of TSX issuers had already adopted a majority voting policy by their 2013 annual meetings.
Nonetheless, the new requirement puts Canada one step ahead of the United States, where plurality voting remains permissible and relatively common. The move represents a significant milestone for the Canadian Coalition of Good Governance (“CCGG”), which has been pushing for mandatory majority voting for over six years and provided some of the language for revised TSX Company Manual. The CCGG has made clear that its majority voting rally isn’t over yet, as it continues to lobby the TSX Venture Exchange for the same corporate governance enhancement.
The new mandate certainly represents a step forward, but still falls somewhat short of the “true majority” voting policy that Glass Lewis prefers, as, pursuant to the new TSX policy, directors that fail to receive majority support from shareholders are not required to step down unless the other board members accept their resignation. However, thanks to the aforementioned language provided by the CCGG, where a director fails to receive majority support “the board shall accept the resignation absent exceptional circumstances,” and, “if the board determines not to accept a resignation, the news release must fully state the reasons for that decision.” These detailed requirements will certainly force the board to take the resignation decision seriously, as boards will be more directly accountable in cases of continued board membership despite majority opposition.
Maybe because AOL is close to home, but I have been fascinated by AOL CEO’s Tim Armstrong’s insensitive explanation for a change to the company’s 401(k) matching contributions that has dropped him into hot water. Probably “incensed” is a better term – but I also am fascinated because I wonder what AOL’s directors are thinking and doing. They themselves must be getting asked by loved ones and colleagues about this miscalculation because it is a media – and social media – hailstorm.
Here’s a 4-minute video that I put together on what the board might be thinking. It addresses these three issues:
1. When (& Should) Board Discuss?
At what point does a CEO’s communication snafu reach:
– Emergency board meeting threshold
– Regular board meeting threshold
– What can a board do anyways (besides dismissal)?
2. Should Board Care About the Media?
To what extent should media coverage impact board’s action:
– Should board obtain all news items?
– Should board receive social media summaries?
– Can board receive social media summaries?
3. Should Board Care About Employee Morale?
– To what extent should employee morale impact board’s action:
– Should board distinguish between 401(k) cut & snafu?
– How can board gauge employee reaction?
– Should it?
ISS: Request for Additional Time to Comment on Long-Term Policies
With ISS’ comment period expiring today for its recent set of proposals to change its long range policies, some are requesting additional time to comment (such as the Society of Corporate Secretaries in this letter; the letter also notes the Society doesn’t like per se director tenure periods). I agree that a three week comment period is short for something so important. And I also wonder why ISS offered this proposals – as well as changes to QuickScore – in the very heart of proxy season. People are very busy…
On the DealLawyers.com Blog last week, I blogged that – in a significant departure from prior guidance, the SEC’s Division of Trading and Markets issued a no-action letter – entitled “M&A Brokers” – that permits a person giving advice on M&A deals to receive transaction-based compensation under certain conditions without having to register as a broker-dealer. Note that the no-action letter is subject to numerous conditions, some of which may limit its utility, including the limitation that it only relates to the sale of privately held companies and that the M&A broker may not directly or indirectly through its affiliates provide financing for an M&A transaction.
Here’s some analysis from Keith Bishop and many other memos posted on DealLawyers.com…